Issue 14 - April 2012
Focus: ISO 20022 in the SEPA Context
Early Movers Confirm: ISO 20022 Message Standards Generate Tangible BenefitsA guide for payment service users on the impact of provisions in the SEPA Regulation regarding the use of the ISO 20022 message standards
27.04.12 By Francis De Roeck
In the world of payments processing, the role of the data format used to exchange information between the parties executing a payment can be compared to the role of language in communication between people. Today, dozens of different data formats are in place to process payments across different national and European clearing systems in SEPA. The realisation of an integrated euro payments market therefore requires agreement on a common set of data to be exchanged in a common syntax when executing a SEPA payment. The SEPA data formats as detailed in the implementation guidelines released by the European Payments Council with regard to the SEPA Credit Transfer and SEPA Direct Debit Schemes are based on the global ISO 20022 message standards developed by the International Organization for Standardization (ISO). The 'Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009' (the SEPA Regulation) details the use of the ISO 20022 message standards by payment service providers (PSPs) and payment service users (PSUs). Article 5 (1) (d) of the SEPA Regulation states that PSPs "must ensure that where a PSU that is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or individual direct debits which are not transmitted individually, but are bundled together for transmission", the ISO 20022 message formats are used. In this article, Francis De Roeck introduces the ISO 20022 message standards within the context of SEPA, what it means for PSUs such as corporates, public administrations and government agencies and offers some insights from early adopters.
Key Information in this Article
The ‘Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009' (the SEPA Regulation) details the use of the ISO 20022 message standards by payment service providers (PSPs) and payment service users (PSUs).
Article 5 (1) (d) of the SEPA Regulation states that PSPs “must ensure that where a PSU that is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or individual direct debits which are not transmitted individually, but are bundled together for transmission”, the ISO 20022 message formats are used. PSUs should therefore make arrangements to adapt to the usage of ISO 20022 XML message standards in the customer-to-bank space in relation to files of payment transactions.
The implementation guidelines published by the European Payments Council with regard to the SEPA Credit Transfer and SEPA Direct Debit Schemes are a subset of the ISO 20022 message standards.
ISO 20022 is a procedure proposed by the International Organization for Standardization (ISO) to develop message standards for all domains of the financial industry aimed at ensuring the highest possible degree of automation, ease of implementation, openness and cost-efficiency. The ISO 20022 approach offers a more efficient and faster way of developing and implementing message standards that serve as the basis for long term financial services solutions.
Early adopters on the demand side of the payments market confirm that further harmonisation of the customer-to-bank communication based on the ISO 20022 message standards generates tangible benefits.
Video ‘ISO 20022 made simple’ © ISO 20022 Universal financial industry message scheme. The EPC would like to thank ISO 20022 and SWIFT Standards for the permission to include this video in the EPC Newsletter.***
Scroll to the end of the page and post a comment.
Provisions in the SEPA Regulation regarding the use of ISO 20022 also impact payment service users. What does this mean?
The European Union (EU) 'Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009' (the SEPA Regulation, see link below), defines 1 February 2014 as the deadline in the euro area for compliance with the core provisions of this Regulation.
As highlighted in the article 'The Time to Act is Now: Impact of the SEPA Regulation on Payment Service Users' in this EPC Newsletter (see 'related articles' below); Article 5 of the SEPA Regulation details the use of the ISO 20022 message standards by payment service providers (PSPs) and payment service users (PSUs). Article 5 (1) (d) states that PSPs "must ensure that where a PSU that is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or individual direct debits which are not transmitted individually, but are bundled together for transmission, the message formats specified in point (1) (b) of the Annex are used". Point (1) (b) of the Annex to the SEPA Regulation specifies that such message formats are the ISO 20022 XML message standards.
Article 16 of the SEPA Regulation permits individual EU Member States to extend the deadline for compliance with some of its provisions to 1 February 2016. Article 16 (5) of the SEPA Regulation allows EU Member States to waive the requirement to use the ISO 20022 message formats for PSUs that initiate or receive individual credit transfers or direct debits that are bundled together for transmission until 1 February 2016, except in cases where a PSU requests such a service. Article 16 (7) states that EU Member States must notify the European Commission by 1 February 2013 of the derogations that they intend to use.
PSUs should therefore make arrangements to adapt to the usage of ISO 20022 XML message standards in the customer-to-bank space in relation to files of payment transactions.
What is the ISO 20022 message standard?
ISO 20022 is not only a suite of message standards but a procedure proposed by the International Organization for Standardization (ISO) to develop message standards for all domains of the financial industry. ISO 20022 is a standard to develop standards, so to speak. The most innovative characteristic of ISO 20022 is its modelling methodology which decouples the business rules from the physical message formats. The models evolve with the business, while the formats evolve with the technology to benefit from the latest innovations. This results in the highest possible degree of automation, ease of implementation, openness and cost-efficiency. The ISO 20022 approach, therefore, offers a more efficient and faster way of developing and implementing message standards that serve as the basis for long term financial services solutions.
ISO 20022 reflects the global nature of the financial services industry, bringing together diverse commercial and financial needs. ISO 20022 creates a level playing field empowering a broad group of stakeholders including end users, suppliers and IT service providers to express their interests in a common work product whilst ensuring maximum transparency in the process. This cooperative and inclusive approach furthermore avoids a situation where multiple standards are developed by different groups in response to the same business need that may materialise in different areas or domains across the globe. At the same time, ISO 20022 supports multiple languages and character sets. ISO 20022 is based on modern tools for scheme creation, publication and use, allowing for even more efficient updates. The standard is aligned with internet technologies and targeted to address increasing industry requirements for application integration. Last but not least, the standard offers the necessary flexibility to incorporate additional requirements as it will evolve reflecting market needs. For more information, visit the ISO 20022 Website (see link below).
Why are the implementation guidelines published by the European Payments Council with regard to SEPA Credit Transfer and SEPA Direct Debits Schemes based on the ISO 20022 message standards?
Article 2 (17) of the SEPA Regulation defines the ISO 20022 XML message standard as "a standard for the development of electronic financial messages as defined by the ISO, encompassing the physical representation of the payment transactions in XML syntax, in accordance with business rules and implementation guidelines of Union-wide schemes for payment transactions falling within the scope of this Regulation." The 'implementation guidelines of Union-wide schemes' referred to in this definition would include, for example, the implementation guidelines published by the European Payments Council (EPC) with regard to the SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) Schemes, which are available on the EPC Website (see links to 'SEPA Credit Transfer' and 'SEPA Direct Debit' below).
In the ISO process, business requirements are defined for all global markets. Different markets have different data needs. Thus, they may need to define their own version within the global standard, specific to their own situation. In this respect, the ISO messages have been adjusted to meet the Single Euro Payments Area (SEPA) requirements. The SEPA data formats as set out in the EPC implementation guidelines are a subset of the global ISO 20022 standards. The role of the EPC in defining the SEPA data formats therefore consists in identifying all necessary data elements for making SEPA payments as defined in the SCT and SDD Rulebooks within the global standard.
How to design a migration plan which helps individual businesses and public entities to transition to the ISO 20022 message standards - and the SCT and SDD Schemes - in time?
Jolanda Schekermans, Senior Business Analyst with SWIFT Standards, recommends that PSUs consider the following when preparing the implementation of the ISO 20022 message standards: "PSUs will have to use the ISO 20022 message standards as detailed in Article 5 (1) (d) of the SEPA Regulation subject to the application of the derogation specified in Article 16 (5). Some of the larger corporates may already be SEPA compliant, however many medium-sized and small businesses, which send and receive bulk files, are now faced with a short timeline of less than twenty-four months to adapt to the SEPA data formats and, ultimately, the SCT and SDD Schemes." The article 'Step Up to the Challenge: SWIFT White Paper Sets out Steps to Build a SEPA Migration Plan' (see 'related links' below) in this EPC Newsletter offers detailed guidance. In summary, the following steps should be taken:
Plan the journey. All impacted organisations need a clear view of where they are starting, where they are heading and what they need to do to achieve SEPA compliance in time to meet the deadline.
Establish the 'as is' picture. Organisations should develop a full inventory of their clearing activities, channel by channel and transaction type by transaction type.
Create a 'SEPA checklist'. The migration checklist should reflect all of an organisation's workflows and obligations, including volumes and the strategic importance of payment instruments being used.
Ensure strategic alignment. SEPA migration provides an opportunity to take a fresh look at flows and infrastructures with a view to streamlining processes. It is also essential to consider SEPA compliance in the context of other impending market changes.
Develop a SEPA migration roadmap. The roadmap should reflect in-house projects, assess outsourcing opportunities and allow for close follow-up of projects and related timelines.
It is recommended that PSUs seek dialogue with their business partners and counterparties when assessing their 'as is' situation and comparing it to the migration requirements. Knowing all the facts will ensure that migration roadmaps are based on realistic assumptions. The EPC Blog Series 'Get Ready for SEPA by February 2014. Early Movers on the Customer Side Share Lessons Learnt' provides valuable insight by project managers who have already successfully concluded migration to the SEPA Schemes and technical standards. Specific aspects addressed in this series, in addition to the implementation of the ISO 20022 message standards, include conversion of customer account data to the International Bank Account Number and the Business Identifier Code and how to choose the best IT strategy to achieve SEPA compliance of the existing IT architecture.
Why is progress in standards implementation in the customer-to-bank space driving forward automated processing?
Migration to the SEPA standards is a challenge for corporates, public administrations and government agencies however the implementation of the ISO 20022 message standards also provides PSUs with the opportunity to optimise standards usage. Corporate treasurers have a key interest in the benefits of standardisation. To date, they usually deal with a number of institutions in various geographical areas and have to adapt their treasury management systems to cope with different legacy instruments and formats. The benefits of standardisation in communication channel formats are therefore numerous.
In the mature payments market, corporates and public administrations alike collaborate with financial institutions to achieve harmonisation and standardisation in the customer-to-bank space. A good example of such collaboration specifically with regard to the ISO 20022 message standards is the Common Global Implementation (CGI) initiative, a global industry forum which brings together representatives of both the demand and supply sides. The CGI has recently published implementation guidelines covering payments, collections and reporting based on the ISO 20022 message standards. The CGI approach to ISO 20022 XML enables the user to benefit from a common business process to improve payment initiation and accounts receivable automation, including reliable transfer of the remittance advice or the remittance advice reference through the banking/PSP chain. In practice, this means that customers can take their cash management to the next level with help of a single global implementation.
The supporters of the CGI initiative focus on further aligning the interpretation of the ISO 20022 messages. As regards the use of these standards in SEPA, they suggest that the existence already of multiple interpretations of the ISO 20022 message standards; i.e. domestic variations of SEPA formats, threaten to undermine key objectives of the SEPA initiative, such as, for example: increased market harmonisation thanks to the convergence of uses and practices; improved efficiency in multi-country payment processing at a PSP-to-PSP (or PSP-to-infrastructure) level and improved efficiency and provider choice for users. For further details on the CGI initiative, refer to the article 'ISO 20022 Message Standards: Too Many Flavours?' (see 'related articles in previous issues' below).
Early movers on the demand side of the payments market confirm that implementation of the ISO 20022 message standards generates substantial benefits. The ceramics manufacturing company Villeroy & Boch, headquartered in Germany and represented in 125 countries around the world, is a true SEPA pioneer. Villeroy & Boch embraced the SEPA vision early and moved swiftly. Dr Warncke, Group Financial Controller at Villeroy & Boch, comments: "We were fully aware that early movers have the most to gain, and therefore wanted to realise the benefits resulting from the harmonisation of the euro payments market as soon as possible." The group completed migration to SCT in 2008 and migration to both SDD Core and SDD Business to Business in 2011. Villeroy & Boch processes some 175,000 credit transfers with a volume of 310 million euros and 25,000 direct debits with a volume of 75 million euros annually.
This player also anticipated the advantages of implementing the ISO 20022 message standards. Dr Warncke adds: "We executed our first ISO 20022 FileAct payments in August 2008. In the fall of 2008, 90 percent of our supplier payments were done through SWIFT using ISO 20022. The implementation of the ISO 20022 message standards reduces the complexities and application development times required to manage our payment architecture. Adapting to this global standard also allowed us to increase security and improve internal processes." For details on the SEPA migration experience of this company and additional implementation benefits, refer to the article 'Villeroy & Boch: 'The Long Term Benefits of SEPA Exceed the Short Term Efforts to Get There' (see 'related articles in this issue' below).
In summary, re-engineering financial services based on the global ISO 20022 message standards drives forward standardisation, automation and dematerialisation and therefore meets a key requirement of corporate treasurers. Upgrading the payment architecture to comply with ISO 20022 also allows both PSPs and PSUs such as businesses and public administrations, to realise the efficiency gains resulting from the implementation of the SCT and SDD Schemes.
Francis De Roeck is the Chair of the EPC Standards Support Group.
EPC Blog Series: Get Ready for SEPA by February 2014. Early Movers on the Customer Side Share Lessons Learnt. (Part IV details the benefits resulting from implementation of the ISO 20022 message standards)
EPC Website: SEPA Credit Transfer (see 'EPC technical documents / implementation guidelines)
EPC Website: SEPA Direct Debit (see 'EPC technical documents / implementation guidelines)
Related articles in this issue:
Related articles in previous issues:
ISO 20022 Message Standards: Too Many Flavours? Domestic specifications of the SEPA data formats risk preventing market harmonisation (EPC Newsletter, Issue 12, October 2011)
Other articles in this issue
27.04.12 EPC Scheme Change Management: Annual Public Consultation Starts in May 2012 - All stakeholders are invited to provide feedback on possible changes to the SEPA payment schemes By Etienne Goosse 27.04.12 EPC Plenary Meeting Update: EPC Elects New Chair Javier Santamaría and Vice Chair Günther Gall to Take Office in June 2012 - Each edition of the EPC Newsletter reports on main decisions taken by the EPC Plenary By Etienne Goosse 27.04.12 The History and Vision of CBI - The EPC Newsletter series provides an overview of banking communication standards in Europe By Liliana Fratini Passi 27.04.12 The Time to Act is Now: Impact of the SEPA Regulation on Payment Service Users - The SEPA Regulation includes provisions relevant for both the demand and supply sides of the payments market By Dermot Turing and Maria Troullinou 27.04.12 Challenges and Opportunities: 'The Social Media in Payments Report 2012' - Latest research provides insight on the industry´s approach to new digital communication channels By Simon Hardie 27.04.12 SEPA Migration: Facts and Figures - The state-of-play in April 2012 By Etienne Goosse 27.04.12 On Innovation: What the European Union Could Learn from Apple and Facebook - Reflections on the evolution of SEPA in the new regulatory reality governing the euro payments market By Javier Santamaría 27.04.12 Step Up to the Challenge: SWIFT White Paper Sets out Steps to Build a SEPA Migration Plan - A strategy to achieve SEPA compliance by 1 February 2014 By Gottfried Leibbrandt and Harry Newman 27.04.12 Villeroy & Boch: "The Long Term Benefits of SEPA Exceed the Short Term Efforts to Get There." - The group completed migration to SEPA Credit Transfer in 2008 and migration to SEPA Direct Debit in 2011 By Dr Markus Warncke (Interview) 27.04.12 SEPA Direct Debit for Billers: Exception Handling - EPC Newsletter series provides support for billers preparing migration to the SDD Schemes By Javier Santamaría and Herman Segers
If you would like to comment on this article, please use the box under the headline 'Add New Comment' below. Please identify yourself with your first and last name. Please note that your name will appear next to your comment. Email addresses will not be published. Please note that by accessing or contributing to the discussion you agree to abide by the EPC Newsletter Terms and Conditions, so please read them carefully before doing so.
To receive notification when a new comment is added to this specific discussion, please subscribe to get updates by email or RSS using the links below. (These links are not available on the mobile version of the EPC Website, to subscribe by email or RSS, please visit the standard version of the EPC Website).